California ushered in the New Year with the usual fanfare and
revelry. But 2012 also uncorked new state disclosure requirements for
retailers and manufacturers concerning the businesses’ efforts to eradicate
human trafficking and slave labor from their supply chains.

At first blush the California Transparency in Supply Chains
Act,1which went
into effect on January 1, appears to be confined to the 3000+ retailers and
manufacturers doing business in California who have annual worldwide gross
receipts of $100 million or more. However, each business subject to the new
reporting requirements must disclose its efforts to analyze and assess
forced labor risks throughout its supply chain — often involving
dozens or more independent suppliers of component parts and materials.

The Act requires a business to provide a link to its human
trafficking and slave labor disclosure on its company website.2 The object of the law is to
enable discerning, socially-conscious consumers — armed with details
concerning companies’ efforts to ensure their products are not tainted by
forced labor — to make informed purchasing decisions.

In addition to the steps taken by a business to avoid slave
labor in its supply chain, the disclosure must identify whether a business
(1) offers training in human trafficking risk mitigation, (2) maintains
internal accountability standards, (3) conducts audits of its suppliers,
and (4) requires its suppliers to certify their components or materials are
not associated with slave labor.

The Act also contains an enforcement provision. A business
that fails to comply could face a lawsuit from the California Attorney
General seeking injunctive relief to remedy alleged violations.Unfortunately,
a lawsuit of this nature can lead not only to legal damages but,
irrespective of the ultimate merits of such allegations, a potential PR
nightmare and scores of fleeing customers.

While the law certainly has an honorable intention, suppliers
can expect that much of the cost and other burdens of compliance faced by
large retailers and manufacturers will be pushed downstream.

What does a supplier need to know about the new law?

The Act will likely spur businesses subject to the law to
implement comprehensive and stringent procedures for policing their direct
suppliers. Suppliers should take steps now to investigate, track, and
document their own efforts to avoid the use of slave labor, so that they
are ready when manufacturers and retailers come calling, especially in the
event of a surprise audit. Even if they are not located in California,
suppliers will be asked to guarantee that the materials or parts they provide
comply with slavery and human trafficking laws in the country of origin.
Suppliers that are unable to trace their components’ provenance could find
themselves at a serious competitive disadvantage as compared with those
companies that are able to comply.

Suppliers doing business with large California retailers and
manufacturers can also expect to be presented with newly rewritten supply
agreements, through which those manufacturers and retailers may seek
contractual indemnity from their suppliers and a certification of a lack of
human rights abuses. Failure to comply with these new terms could expose a
supplier to litigation or simply a loss of business relationships with its
retailers or manufacturers.

Suppliers should be cognizant of this new law and be prepared
for their manufacturing and retailing customers doing business in
California to push them to implement potentially costly and burdensome
internal procedures, or risk jeopardizing profitable upstream
relationships. Many suppliers, particularly those with bargaining power,
will likely be prepared to push back against absorbing these added costs.
But suppliers can also get ahead of this pressure by identifying and
enhancing existing procedures now and, by doing so, proactively position
themselves as industry leaders in compliance as compared with their
competitors.

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